For years, Pleasanton was a commuter community to industries in Middle

Question

For years, Pleasanton was a commuter community to industries in Middleburg. The close of several factories in Middleburg has set in motion a wave of mortgage defaults: citizens of Pleasanton are foreclosing on their houses in significant numbers. Many of the mortgages were held by local banks, and these adversely affected banks have been under pressure from their boards to offset the banks' losses. One principal means to recoup these losses is for the banks to raise interest rates, including mortgage rates. If those owning property Pleasanton continue to default on their mortgages, then the mortgage rates offered by these banks will continue to rise.

Which of the following, if true, best supports the conclusion that mortgage rates in Pleasanton will continue to increase?

A. Mortgage rates in Middleburg have been steadily increasing over the past year and analysts expect them to continue increasing for some time.

B. Many prospective homebuyers in the Pleasanton area, deterred by increased mortgage rates, have decided to purchase homes in other areas.

C. Many current homeowners in Pleasanton, in reaction to increased interest rates, have put their homes on the market and are looking for homes in other areas.

D. Many local businesses in Pleasanton, who were dependent on local residents employed in Middleburg, have been unable to pay the mortgage on the business properties they own.

E. There are so few houses in Pleasanton that the banks cannot realize an economy of scale, making mortgage rates unrealistic for most potential homeowners.

Aseem1997 · Answer

I will go with option E. As it clearly says, banks cant depend on economy to become better. They will continue to increase mortgage rates for more potential buyers

nayas96 · Answer

Can someone please explain the reason why option (C) cannot be the answer ?
If people are suppose putting their houses in the market meaning they are selling their houses and will use that money to buy houses somewhere else, so the bank would not have money and to get money they would increase the interest rates.

egmat   Bunuel   GMATNinja   carouselambra   KarishmaB   mira93 
Kindly please help me clarify my answer

KarishmaB · Answer

If the seller is selling the house, a buyer will buy it. So the buyer will take a mortgage from the bank. So it's no loss to the bank. So (C) is not correct.
But the argument is not air tight so you may want to ignore it.

Vibhatu · Answer

Can someone please explain the reason why option (E) cannot be the answer ?

KarishmaB · Answer

"Few houses in Pleasanton" is not a change that has taken place from before. The. number of houses were few and are still few. This will not increase mortgage rates. The rates were set based on this condition which existed before also. The banks cannot increase the rates based on this fact which existed at lower rates too. 
We are looking for something that tells us about a change in the present or future - something that will lead to more losses to the bank and hence continued increase in mortgage rates. That is why (E) is not correct.

Ritik25 · Answer

Can someone explain why D is the answer and not A?

pintukr · Answer

For years, Pleasanton was a commuter community to industries in Middleburg. The close of several factories in Middleburg has set in motion a wave of mortgage defaults: citizens of Pleasanton are foreclosing on their houses in significant numbers. Many of the mortgages were held by local banks, and these adversely affected banks have been under pressure from their boards to offset the banks' losses. One principal means to recoup these losses is for the banks to raise interest rates, including mortgage rates. If those owning property Pleasanton continue to default on their mortgages, then the mortgage rates offered by these banks will continue to rise. 
 
   Conclusion . The mortgage rates offered by these banks will continue to rise (implicit assumptions that defaults will continue; no other means with banks to cover the losses etc)

Which of the following, if true, best supports the conclusion that mortgage rates in Pleasanton will continue to increase?

A. Mortgage rates in Middleburg have been steadily increasing over the past year and analysts expect them to continue increasing for some time. 
  Since the facts pertaining to 'increase in mortgage rates' already included in the prompt...can't be dubbed a strengthener 
 
 B. Many prospective homebuyers in the Pleasanton area, deterred by increased mortgage rates, have decided to purchase homes in other areas. 
  Irrelevant, since it provides no impact on conclusion that the mortgage rates will continue to increase 
 
 C. Many current homeowners in Pleasanton, in reaction to increased interest rates, have put their homes on the market and are looking for homes in other areas. 
  Out of scope, since the argument is not concerned with current homeowners' attitudes/reactions 
 
 D. Many local businesses in Pleasanton, who were dependent on local residents employed in Middleburg, have been unable to pay the mortgage on the business properties they own. 
  Since the local businesses will unable to pay the mortgages on their businesses, the banks will have no other source to recover losses due to defaults pertaining to mortgages on homes. It, thus, strengthens the assumption underlying the argument. So, clearly a strengthener.

E. There are so few houses in Pleasanton that the banks cannot realize an economy of scale, making mortgage rates unrealistic for most potential homeowners. 
  again, unrealistic mortgage rates for homeowners already highlighted in the prompt.

(D) is the CORRECT answer

For years, Pleasanton was a commuter community to industries in Middle

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For years, Pleasanton was a commuter community to industries in Middle

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